Question

The Conference Board’s Report of Economic Indicators recently published the following report:

The Conference Board announced today that interest rates remain low. Reports indicate that companies are holding lower inventories and capital expenditures have decreased. The availability of credit continues to be tight.

Based on the above report, which of the following best describes the current stage in the general business cycle?

A.Early expansion

B.Late expansion

C.Early contraction

D.Late contraction

Answer 1

The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy. The business cycle goes through four major phases: expansion, peak, contraction, and trough. They don’t occur at regular intervals, but they do have recognizable indicators.

An expansion is between the trough and the peak. That's when the economy is growing.

Contraction starts at the peak (early contraction) and ends at the trough (late contraction). Economic growth weakens. Demand is at its lowest levels and the economy faces lack of liquidity. Which eventually leads to losses to business and ultimately exhaustion of their funds.

In the question given above, it is mentioned that:

1. Interest rate remains low (Which indicates that the economy is weak, and the Federal Bank wants to increase the liquidity in the economy)
2. Companies are holding lower inventories (Which indicated lower demand)
3. Capital expenditures have decreased (The company's funds have exhausted)
4. The availability of credit continues to be tight (Which indicates lack of liquidity in the economy)

Hence, all the above points indicate that the current stage of the business cycle is Late Contraction (Option D).